Disaster-proofing the Supply Chain

Using supply chain solutions to prepare for the next "Big One"

By Andrew K. Reese

Devastating terrorist attacks. Cataclysmic tsunamis. Catastrophic hurricanes. If these disastrous events in recent years have taught Dana Mathes anything, it's that that in this day and age, you really just don't know what manmade or natural calamity might threaten to wreak havoc upon your supply chain next. "It's very hard to understand or quantify what the threats are these days," says Mathes, who is global supply chain director of logistics operations at Dow Chemical, the $49 billion producer of plastics, chemical and agricultural products.

But as hard as it may be, thinking about the unthinkable has become an integral part of the job for Mathes, as it has for supply chain executives at many other enterprises. Because, for better or worse, in this age of lean, extended and outsourced operations, "disaster-proofing" your supply chain isn't an option, it's an obligation.

Risk Management Rising

In the aftermath of recent disasters, supply chain risk management (SCRM) has been gaining increased executive-level attention in the past few years. For example, in a recent report by AMR Research, "Managing Risk in the Supply Chain — A Quantitative Study," authors Mark Hillman and Heather Keltz note that more than half (54 percent) of 89 executives surveyed for the report said that their companies planned to increase spending on SCRM in the following 12 months. Nearly as many (46 percent) said their companies planned to implement or evaluate SCRM technology within the next two years, and one-third said they already have dedicated budget line items for SCRM.

The reason for this upsurge in interest appears clear: Executives believe that the threats to their supply chains are on the rise. In fact, in a September 2006 survey of 3,172 management leaders by consulting firm McKinsey, almost two-thirds of the respondents reported that the risks to their supply chains had increased over the previous five years. These anxieties may stem from the string of major disasters that have affected global supply chains in the new millennium, but at the same time macro-economic trends also are increasing supply chains' risk profiles. AMR's Hillman and Keltz point out that the greater adoption of global sourcing and outsourced manufacturing strategies has left supply chains more exposed to potential disruptions than in the past. "At stake are billions of dollars of stock market capitalization, market share losses from failed product launches or even the possibility of going out of business because of an inadequate understanding of the magnitude of supply chain risks," the analysts write. No wonder executives are nervous.

However, despite the heightened focus on SCRM, executives still give poor ratings to their companies' ability to manage risks. McKinsey's survey revealed that more than half (53 percent) of the respondents rated their companies as only "somewhat capable" of mitigating key supply chain risks, while another quarter (27 percent) offered a grade of "slightly capable." One reason for this insecurity about companies' risk management capabilities may be that for a long time many enterprises have been willing to "pass the buck" when it comes to securing their supply chains. J. Michael Barrett, a terrorism and homeland security expert who is coauthor of the recent book Securing Global Transportation Networks: A Total Security Management Approach, says that too many companies have been "outsourcing" risk by not assuming responsibility for securing their own supply chains against disasters. "Everybody agrees that security is important, but they want somebody else to deal with it," Barrett says. "Everyone ends up pointing at the next person in the supply chain, and as a result, the buck doesn't stop anywhere and we wind up with an incredibly insecure global transportation system."

Tools for Disaster-proofing

The good news is that companies looking to adopt a more proactive approach to disaster-proofing their supply chains probably have many of the required tools already at their disposal. "It's not as if a whole new set of decisions around technology or innovation need to be made to deal with a possible natural disaster," says Greg Johnsen, executive vice president and cofounder of GT Nexus, an on-demand global trade and logistics portal. In fact, Johnsen says, companies should think of disaster response in the same way that they think of the supply chain issues that confront them every day, such as supply constraints or demand spikes. "The technologies or innovations that are applied to disaster-proofing a supply chain are the same as you would use to have a more resilient supply chain or to address everyday commercial issues," he says.

For instance, many companies are putting in place real-time supply chain visibility systems that have dual applicability in non-disaster and disaster situations. A retailer that hits a demand spike as a result of a successful promotion would want to have visibility into how much inventory is incoming and whether that same inventory exists in other supply chain lines and could be redirected to meet the increased demand. That same retailer could face a natural disaster scenario that results in problems at a major port. In this case, the retailer would want to assess very quickly the impact of port delays on its distribution network. "Global visibility, enabled by an 'all-seeing' technology platform, is the solution for dealing with both those circumstances," Johnsen says.

Restaurant chain Subway provides an example of a company that is finding its efforts to improve the business can have payoffs when it comes to handling unplanned events. Subway has deployed a foodservice management solution from Instill that allows its network of 60 suppliers, more than 200 suppliers' plants, some 20,000 restaurants and eight distribution centers to collaborate on, track and optimize the flow of goods through the supply chain. The company has estimated it is saving more than $1 million annually thanks to the efficiencies enabled by the solution. But the company also can leverage the system to rapidly identify trends and potential issues with, for example, product quality before they can escalate beyond a localized level. The Instill solution provides a central database to capture product data all the way through the supply chain, so that problems can be traced to their source and quickly resolved collaboratively with partners regardless of the source of the issue.

Supply chain planning and network design also have a place in enabling both more efficient overall supply chain operations and a solid disaster-response strategy, according to Jim Caudill, vice president of solutions with supply chain solution provider i2 Technologies. Many companies, he says, already have been moving to accelerate the frequency with which they review their supply networks as part of their sales and operations planning (S&OP) process. "We see our customers moving toward an incremental planning process, with iterative changes to the plan as the execution process advances," Caudill explains. "The key here is shortening the cycle time between planning iterations. And then, when some disruption occurs, you can fall back on this process very quickly to respond rapidly in the most appropriate way." The idea, in other words, is to build a process for planning "on the fly," when necessary, to respond to changes, regardless of the cause to those changes.

Jerry Hill, vice president for industry consulting at solution provider Teradata, a provider of enterprise data warehousing and analytical solutions, believes that a rapid response strategy must be supported by best practice data management techniques and an underlying data infrastructure that can reduce the latency of data that executives have at their disposal when they are facing a supply chain disruption. "When a 'situation' arises, you should be able to turn to your data warehouse and craft queries very quickly so that you can get detailed information to assess the impact and put it into the context of your overall business," Hill says. The goal, he continues, is to enable a supply chain executive to have a decision-making foundation that rises above the level of "gut reaction," that is, to turn disaster response into more of a science than an art.

"Disaster-proofing" Dow Chemical's Supply Chain

Dow Chemical has a long history of applying science to solve thorny problems. In 1995, Dow undertook a 10-year program aimed at improving its safety and environmental performance, resulting in significant progress across a variety of metrics. Two years ago, the company renewed the drive, setting 2005 as the baseline and establishing another 10-year set of targets and goals centered on sustainability. As part of the new initiatives, Dow undertook to reduce what it calls its "footprint" for the shipment of highly hazardous chemicals; an essential component of reducing this footprint is improving the company's ability to respond to any incidents involving these chemicals. "Our incident rate is very, very, very low," says Mathes, "but we want to drive it to absolute zero."

Dow's challenge is formidable. The company is the largest bulk chemical shipper in North America by truck and by rail, and its fleet of 26,000 railcars is the second largest in the world. As global supply chain director of logistics operations at Dow, Mathes oversees the company's complex worldwide logistics network, which handles shipments of more than 100 billion units of product annually from sites in 200 countries to 45,000 customer locations. Overall, Dow has been ranked as the seventh largest U.S. exporter and 64th largest U.S. importer. Lots of product in motion, lots of exposure to potential disruptions.

Dow's strategy for supply chain sustainability includes four elements: shipping container design, supply chain visibility, greater collaboration with private and public sector partners, and supply chain redesign. With regard to the first, Dow has traditionally adhered to high standards for packaging its goods, essentially "over-packaging" materials to exceed government standards, but the company also has come together with other shippers, transportation service providers and government agencies to develop new container designs that are safer and more secure. Dow is conducting a number of active projects targeting incremental upgrades to container design, and it has partnered in a major project with Union Pacific Railroad and Union Tank Car Company to develop a "next-generation" railcar that could incorporate various new concepts and technologies, such as head and side impact limiters, electronically controlled pneumatic brakes, crumple zones and impact-resistant coatings.

The company's supply chain visibility initiatives involve applying a mix of track-and-trace technologies — including radio frequency identification (RFID) and GPS, in combination with good old fashioned bar codes — to heighten security and improve overall supply chain efficiency. Packaging for products retains the traditional bar code, while shipping containers may be tagged with RFID devices, and transport vehicles are outfitted with GPS technology, all of which allows for tracking goods throughout their movement in the supply chain. Dow takes a multi-mode approach to shipping, and the company has tracking initiatives running in all its transportation modes.

On the collaboration front, Dow is working with the chemical industry, shipping community, customers, and other public and private sector partners to improve supply chain infrastructure and emergency preparedness and response. In one recently announced joint initiative, Dow is working with the Chemical Transportation Emergency Center (CHEMTREC) — a 24-hour emergency call center established 36 years ago by the American Chemistry Council (ACC) to facilitate immediate emergency response information for accidental chemical releases — on a full-scale demonstration project intended to improve railcar tracking and information sharing between the two organizations. "The Dow Chemical Company Railcar Shipment Visibility Initiative" aims to enable surveillance of highly hazardous materials in transit and provide for better communications for emergency responders nationwide to protect the safety and security of the communities through which these materials are transported. This project equips Dow's existing Toxic Inhalation Hazard (TIH) material railcar fleet with GPS and sensor technologies to allow electronic monitoring of the location and condition of rail cars and their contents. CHEMTREC will have access to a newly created Web-based network that will supplement its existing communications network to make data available to emergency responders through its system in the event of an incident involving Dow shipments of TIH materials.

The chemical company's initiatives around supply chain design aim to reduce the total inventory of TIH chemicals in the supply network at any given time and to reduce the movement of chemicals through the network. The strategies that Dow is applying to meet these goals include seeking alternate sourcing arrangements through exchanges, swaps and contract manufacturing agreements; avoiding new, long-term shipments of highly hazardous materials; establishing alternate modes of delivery, with greater producer/user process integration and more discipline in customer selection/qualification; converting chemicals to less hazardous derivatives prior to shipment; and pursuing process integration with suppliers and customers to explore alternative products and co-location.

The ROI on a Disaster-proof Supply Chain

The results to date that Dow has achieved in its sustainability initiatives underscore that building increased preparedness, resiliency, safety and security into the supply chain need not be a cost-only equation. "The first reaction that most people have when they think of more security is that this will increase cost," Mathes says. "That's true in some cases, but on the whole we've found that increased safety makes good business sense, too. When you get creative and find ways to change the design of your supply chain, you can find different routings or different suppliers in a way that reduces the total freight and therefore reduces costs. There is some investment, but there's a return on the investment, too."

In one discrete example, Dow's supply chain staff worked with the manufacturing side of the company to identify ways to reduce the inventory of one highly toxic material, improving the overall safety of the operation — and, by the way, cutting inventory by $160,000 at the same time. In another case, Dow reduced the transportation of a particular material by about two-thirds, resulting again in improved safety, but also saving the company millions in annual operating costs. Likewise, Dow's supply chain visibility projects have resulted in a 50 percent improvement in response time to identify and resolve in-transit problems, a critical metric that will allow the company to respond much more quickly in the event of a natural or manmade disaster. But the initiatives also have produced a 20 percent reduction in excess product or safety stock inventory, a 20 percent reduction in the company's container fleet, and up to 90 percent improvement of delivery time windows.

Other companies are finding that their efforts to improve the resilience of their supply chains can yield concrete business benefits as well. Liqueur producer Grand Marnier, for example, has implemented a track-and-trace application called G.O.L.D. Stock from Aldata Solution to meet U.S. bioterrorism regulations. Deployed in 2004, the solution has given the company the ability to locate and trace its entire production and distribution supply chain, from raw materials through to finished goods, in compliance with regulatory requirements. But the company also has identified such additional benefits as improved inventory management, standardization of many warehouse functions, and better storage and flexibility in forklift truck driver operations due to automation. In general, J. Michael Barrett, the terrorism and homeland security expert, says that companies are likely to find that the time and effort they spend on reinforcing their supply chains against disasters will pay off when they run up against normal business disruptions. "The investment in resiliency is agnostic to the type of risk," he says. "It doesn't matter whether it's a hurricane or a manmade incident or some other disruption. Having a resilient system will be useful whatever happens."

Best Practices for Disaster-proofing the Supply Chain

Blake Johnson, a consulting professor of management science and engineering at Stanford University, compares running a supply chain to driving a car with a dirty windshield. If the driver can peer only through one clean spot on the windshield and see only what is directly in front of the car, the driver's assumption is that everything will go according to plan and nothing will move into the car's path from either side to disrupt its forward motion. As anyone who has driven in rush hour traffic or had a supplier go bankrupt or missed a delivery date can attest, disruptions happen. "We need to clean that windshield and understand that there are a lot of different outcomes that can occur," says Johnson, who has done considerable research into the quantification and management of risk and flexibility for industrial companies.

In the supply chain context, Johnson continues, cleaning the windshield means identifying the sources of uncertainty in the supply chain, as well as the magnitude and timing of the uncertainty, and then incorporating this information into the supply chain decision-making process. Suddenly options that might otherwise appear irrational start making good financial sense. For example, rather than sourcing all of a particular mission-critical component from low-cost, long lead-time suppliers in Asia, a company might employ a supplier diversification strategy that calls for procuring some percentage of the component from a higher-cost, but shorter lead-time — and more secure and readily accessible — near-shore or onshore supplier less subject to potential disruptions. "In part, that's classic good sourcing practices," Johnson says. "But there are dimensions around risk that people can develop further to understand their exposure to different kinds of events."

Dana Mathes believes that another key success factor for disaster-proofing the supply chain is turning sustainability or resilience into part of an ongoing process within the enterprise. "At Dow, we included our supply chain sustainability goals in our overall corporate goals, so they're very visible, and they're going to be reviewed every quarter for the next ten years, so they'll stay visible. We also assign a champion to each of those supply chain goals, so it's very clear that there is accountability for meeting the goals." Mathes emphasizes that education is critical to ensure the ongoing success of a supply chain sustainability initiative, particularly education directed at internal constituencies. "We have always had quite a strong safety culture, and we understand the importance of doing everything possible to prevent accidents," he says. "What's new since 9/11 is the security threat. Because that's something that's outside of most of our experiences, it is important for us to help everybody understand how the security issues are different from our historical safety issues. And it's important to help people see how sustainability integrates with their business agenda, that it's not only about reducing risk but also about looking for ways to enhance the profitability of the company. It isn't just a cost. It really can be part of the business agenda."